Fighting the system

Hollywood has a new star studio with a different approach to the film business

WHEN some of Hollywood’s biggest studios were pitched a film based on a book series in which young people fight to the death at the behest of a totalitarian government, they passed on it. Bad call. Lionsgate, a fast-growing independent studio, grabbed it, and five years later “The Hunger Games” is one of the most successful film franchises in cinema history.

Like the films’ heroine, Katniss Everdeen (Jennifer Lawrence, pictured), Lionsgate has achieved a level of success no one predicted. American box-office figures for 2013 are now in, and they show that the second “Hunger Games” film helped Lionsgate to overtake Paramount and Fox (see table). Other than the surviving six “majors”, all dating from the age of Gloria Swanson and Rudy Valentino, the young challenger, founded only 17 years ago in Canada, is the only studio to have grossed more than $1 billion in a year, as it did in 2012 and 2013.

Until recently Lionsgate was best known for its cheap but profitable horror and “genre” flicks, such as the gory “Saw” series and comedies featuring Tyler Perry, a black man who impersonates an old lady. In 2011 it fought off Carl Icahn, an activist investor, who had waged a three-year campaign to oust Lionsgate’s leaders and merge it with MGM, a legendary studio that had long lost its roar.

Lionsgate has risen by melding risk aversion with serious ambition. Jon Feltheimer, its boss, and Michael Burns, its dealmaking vice-chairman, have made a series of wise transactions, most notably a 2003 merger with Artisan Entertainment, which had a big film library, and the 2012 takeover of Summit Entertainment, another independent studio, for about $413m. Summit brought into Lionsgate’s den the “Twilight” franchise, an extraordinarily lucrative film series about a love affair between a brunette and a vampire. Since then Lionsgate’s market capitalisation has more than tripled, to over $4.1 billion.

Lionsgate’s television unit, which brings in about one-seventh of its revenues, has also had a run of hits, from “Mad Men”, about 1960s advertising folk, to “Nashville”, a tale of country-music stars. Its bosses want to keep expanding the TV side until it is about a third of the entire business.

Unlike the old Hollywood majors, it has no studio backlot: its offices are in a dull office block in Santa Monica. It licenses out most of the international rights to its films in advance, and thus it usually has no more than $15m at stake in films that may cost several times as much to shoot. This protects it against catastrophic losses like those that sank past challengers to the Hollywood majors (such as United Artists when “Heaven’s Gate” flopped in 1980). However, it also limits Lionsgate’s upside when its films do well abroad.

Lionsgate is lean, with only 550 or so employees compared with around 10,000 at Warner Bros. That means quicker decisions, and less chance that good ideas get stuck in “development hell”. The lemming-like majors all shove their blockbusters onto the market simultaneously in the summer holidays and at Christmas; Lionsgate slips out releases at times when punters are less overwhelmed with choice. It has been bolder than its rivals at releasing films for “on-demand” home viewing at the same time as they open in the cinemas: it did so with “Margin Call” and “Arbitrage”, two tales about dodgy financiers.

The majors are nowadays all part of large conglomerates, but Lionsgate has no sugar-daddy to run to if it hits hard times. However, its independence has also freed it to pursue opportunities others might neglect. Kevin Beggs, the boss of Lionsgate’s TV business, calls it “the Switzerland of television: we look everywhere, and we don’t have a conflict.” Other studios were slower to make programmes for Netflix and similar digital firms, because their parent companies owned broadcast networks and big cable channels that could be threatened by such services, says Alan Gould of Evercore, an investment bank.

Other studios are all doing, with varying degrees of success, some of what Lionsgate has been doing. They are investing in expensive, special-effect-laden “franchise” films featuring familiar characters: Lionsgate’s recent hits are proof that Hollywood is now a franchise business, says David Ellison, the boss of Skydance Productions, a film-financing company. They are also expanding their television sides, to offset the lumpiness of earnings from films. And some are, like Lionsgate, seeking to hedge risks. One way to do this is to sell stakes in big-budget productions to outside firms and wealthy individuals, the “modern Medicis”, in the words of Amir Malin of Qualia Capital, a private-equity firm.

With more “Hunger Games” films to come, analysts expect big profits for Lionsgate through to 2017. Some worry that it may then run out stardust. So Lionsgate needs to keep looking for new franchises. Mr Feltheimer hopes that “Divergent”, a book adaptation about a society that categorises citizens into different groups, could be its next mother lode. He will know in March, when its first film is released. But blockbusters’ ability to bust blocks is as unpredictable as ever. Lionsgate had great expectations for “Ender’s Game”, a military sci-fi film, but it grossed only $112m worldwide, barely covering its $110m production budget, let alone the marketing costs.

It is in the nature of Hollywood that unknowns rise rapidly to fame, only to burn out. A young studio can keep costs lean in the beginning, but when it hits a high, it becomes harder to plead poverty to actors and directors asking for more money. Look at New Line Cinema, founded in 1967, and latterly the “indy” division of Warner Bros. It rose in the 1980s, and went on to claim hits like the “Lord of the Rings” film trilogy, but it overstretched and spent too much on films that no one much wanted to see. Diverse revenue streams can help insulate failures, but do not insure against them. As Katniss Everdeen and any film fan knows, one can win one “Hunger Games” only to be thrown back in, and be forced to fight another round.